Odd Lots - Jan Toporowski Explains Why Capitalists Dislike Full Employment

Episode Date: February 10, 2023

In the wake of the Great Financial Crisis, the work of John Maynard Keynes experienced a revival, as people sought answers to the problem of sluggish growth. In this cycle, sluggish growth isn't the problem. If anything, you hear business leaders and central bankers talking about the labor market being "too hot," and the need for the unemployment rate to rise. So what explains the current dynamic? And how can we sustain a hot economy without the pain of inflation? Perhaps the work of the lesser-known Polish economist Michał Kalecki holds the answers. Like Keynes, he also viewed the free market as being inherently unstable, but he came to different conclusions about why. He also explored the political economy of full employment and why this condition frustrates business leaders. On this episode, we speak with Jan Toporowski, professor of Economics and Finance at SOAS University of London, about Kalecki's work and how it can help us understand today's economy.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, you said something on a recent episode, and I don't remember which one it was, one of our macro ones. Maybe like Neil and Connor or something like that. This idea is still that we sort of talk about like release. at the idea of labor market softening. It's kind of perverse. First of all, thank you so much for listening to what I say.

I really appreciate that. Secondly, I think what I said is it feels really weird that you have a central bank, specifically the Federal Reserve, that is saying basically that they want to push the unemployment rate up. Yeah, and significantly, right? So we're at around 3.5% unemployment right now. 50-year low. A 50-year low.

Which sounds great. That seems unambiguous. good. And especially, you know, after coming after years of slow labor market growth, some of the fears during the worst of the COVID pandemic about how much unemployment there is. And yet here we are, and it's almost always talked about as a problem to be solved rather than an opportunity to be embraced. Yeah. There's always concern that you're running an economy too hot if employment gets too low. But then that just brings up all these really big picture questions about well, what is the economy for anyway? Shouldn't we be aiming for a system that kind of works for everyone,

where, you know, hopefully the unemployment rate is very, very low? But I guess the risk is and the concern is that you don't want to run it in such a way that it starts pushing up prices and you get this unrelenting inflation. Right. And inflation is bad. It hurts people and people don't like it. But nonetheless, I think people find it strange that the central bank is part of what they see is an outcome of optable monetary policy would put so many, you know, at least another million to have people out of work. They find it strange when weak labor market data often leads to a stock market rally. Right. The whole bad news is good news for stocks. That feels perverse. And, you know, you'd think like, okay, a lot of people have jobs.

That means a lot of spending. Corporate profits really high. Like, you think these are like good things. And yet at some level, it's like all of this is bad. And I think like we shouldn't just jump away from that. Like we shouldn't sort of move on and of course there's room to discuss soft landings and all that. But some of these root questions I think are still worth thinking about. Like why do investors hate full employment? Yeah, yeah, exactly right. So I'm really excited about our guests. So one of the economists from the old days that people sometimes talk about when they're talking about the political economy of full employment or maximum employment, an economist named Mikhail Kalev, has talked about this. His,

work comes up every once in a while. So we're going to be speaking to an economist who himself has studied a lot of Kalecki's work and has done his own work on a lot of these questions. I'm trying to understand a little bit more about this like tension that full employment brings. We're going to be speaking to a Jan Tuporovsky, a professor at Sois University in London. And so Professor Tuporovsky, thank you so much for coming on outlaws. Thank you very much for inviting me. Why don't you tell us a little bit about your work and your research and sort of like what what drove you to sort of focus on some of these topics? Well, I came into this kind of work.

I actually came across Kaleski when I first came to study economics. Now, at the time when I actually didn't do my undergraduate studies in economics, it was more in social. and political science. And the first job that I got was in fund management for the Church of England, for an institution called Augustus Institution or the Church Commissioners for England. And because I had done one course in introductory economics,

they thought, oh, well, he knows something about it. And they put me into the district exchange investments department. Now this was in 1974, you're obviously too young to remember what happened around 1974, but there was an oil price shock which in England was rapidly followed by a collapse in the real estate market, a collapse in the stock, a collapse in the stock market. A couple of brokers, brokerage houses went bust. Banks started, some of the fringe banks went bust. A major bank tottered. The Bank of England had to call in the senior city of London figures to try and shore up the position.

And now for me, you know, as a... as a newcomer to all of this, I thought this was tremendously exciting. But I thought, well, I need to find out more about it. I need to study economics. So I went, I registered at Birkbeck College, part of the University of London, for an MSC in economics.

And I was actually greatly disappointed because all my professors would stand up and say, look, we have this general equilibrium model, the economy and my my senior professor the senior professor there a very distinguished uh american british economist i remember standing in class and saying uh look the economy out there it's in equilibrium we know it's in equilibrium you know the models say so and i remember sitting there thinking i don't know what world this man lives in you know what he was saying had no bearing showed no understanding of what was really going on i remember

going down to the library and flicking through some books and coming across a polish name mehau kaletsky and i thought oh i wonder what what he has to say about this i didn't realize that there was there were any distinguished polish economists so i started reading the book and it was his early essays on the business cycle and suddenly it all made sense and it's continued to make sense since then albeit i think i take a rather different view to many followers of of mihail kaletsky in the sense that i'm i have this background in banking and finance i've all the best do this has always been my approach to the work of kaletsky

So I think your question, the issues that you're raising are absolutely fundamental to my understanding of Kaleski. And I wish they were more fundamental to the understanding of many of my friends and colleagues who follow Kaleski. Well, Jan, talk to us then about what it was that you read that made sense to you. And I'm particularly interested in the relationship between the business cycle and, you know, theoretical equilibrium levels and full employment, as you kind of just alluded to. The general equilibrium approach is essentially a static approach. It tells you what situation will arise where there will be no further change. And this actually doesn't happen in the real world.

What you have in the real world is a constant state of flux. And this is why Kallitsky's approach to economics, focusing on a business cycle, I think is really much more satisfying than than the approach, for example, of Keynes in the general theory, which is essentially a static approach to a problem that is fundamentally dynamic. So what do you explain? Because when I think of, you know, Keynes also wrestled with these topics of why don't, why doesn't

a market economy on its own create full employment? Why is investment inadequate in typical times? Why do we tend to these periods of stagnation? How did Kellechki differ from Keynes on these questions? Let me start off with what he agreed with Keynes on. And he agreed with Keynes that capitalism is fundamentally a system that in which the level of output, the overall level of output and the overall level of employment, is determined by the level of investment, the level of business investment.

Now, obviously, in the post-war, post-second world war economy, the government spending also has a lot to do with it, but fundamentally, the private sector, the level of activity in the private sector is really determined by the level of investment. And the question is, what causes that level of investment to be unstable, much, much more unstable than, for example, consumption? And this was an answer that in many respects tormented Kaleski throughout his life. He would put forward various models and then reflect on them and decide that no. they were wrong.

Keynes sort of tried to cover up this problem by saying, it's all due to animal spirits. It's all due to uncertainty. The problem with this is that uncertainty and and animal spirits are not, measurable in the same way that, for example, steel production is measurable. It's really pushing the solution onto what cannot be seen and cannot be observed. And Kaletsky's background was as an engineer,

and he found this deeply unsatisfactory, He tried to resolve it. Certainly he thought that the rate of interest didn't have much impact. Businessmen, he thought, were on the whole, much more cynical, much more hard-bitten than to be influenced by, let's say, ephemeral moods and temperament. In fact, the way in which corporations are constructed, the hierarchical, bureaucratic way in which business corporations are constructed is really in order to eliminate the effect of passions and biases

on issues like investment. In the end, what Kletzky thought was really most important it was the issue of capacity utilization businesses will invest

if they've got customers that cannot be satisfied from existing production even at full capacity and what they will then do is if let's say if

the restaurant is full and there are still customers at the door, then the restaurant owner will invest in more tables, expand his premises. And he then explained it interestingly enough in the form of a very nice parable. He said in the United States there are cities which are joined by more than one railway line and the effect of their if you have if they're both operating at less than full capacity the effect of competition between them will be that eventually one of those railway lines will go out of business and you'll end up in a situation with much less capacity and actually much less employment much more

much much less output so what is the answer to this problem of underutilization of capacity and build a third railway exactly you've read the article it's a lovely parable and then and of course the the the first two railway lines will be busy ferrying all the the workers and the steel and required to for building the third railway line then of course you've now got three railway lines at the end of this you now have three railway lines what you do then and so he said well the answer is you build a fourth railway line and then and he said well you know all all this sounds paradoxical and but he said well it's the system that's paradoxical and the reason why it's paradoxical is that it's a system that's a system that depends on the level of investment and what's critical about the level of investment is that

it's the level of investment that according to Kaletsky but also Keynes determines how much profits businesses will make. Businesses invest a lot they will make a lot of in profits. If they don't invest so much, then it doesn't, you have this problem of excess capacity, discouraging economic activity, discouraging investment. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra.

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It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact on the IHeart radio app, Apple podcast, or wherever you get your podcast. So my understanding of Keynes is that, you know, Keynes also wrote a lot about the business cycle and believed that the business cycle could be managed in one way or another through monetary policy or smoothed in some way. What does Koletsky say about managing the business cycles or investment given its importance in the cycle? Well, Kaletsky thought that managing the economy by

trying to influence the level of investment is really a fool's game because you, for example you may lower the rate of interest or lower the rate of taxation you know give additional tax allowances and then you find that okay business takes takes up a certain amount of investment does some investment and then requires further tax cuts further cuts in the rate of interest in it in order to invest further and it really it really doesn't make sense it doesn't make sense for kaletsky because the purpose of investment shouldn't be to maintain full employment there are other instruments for doing this the the purpose of investment should be to provide the capacity for the amount of consumption that is required in the economy.

That's how a rational economy would operate. So this again was a small difference between Keynes and Kaletsky. Keynes wanted investment to be the leader. Kalitsky argued that in fact you can create the equivalent of an investment, boom through fiscal stimulus. It has the same effect of expanding profits and particularly using the fiscal stimulus to provide additional public goods and public services, which would be provided free. So this gets around the problem of raising wages. You can increase real wages by providing free public goods. And then, of course, the other way is to redistribute income from higher incomes to

lower incomes, again, by various transfer payments. So to bring it up to today, and I don't know if we have full employment, because I'm not even, I'm not even sure what that means, but we have very low unemployment, the lowest in 50 years. Some might say, okay, that's close to full employment, but that's a separate debate. But people, there's like this, it repels people. It's almost like there's like these white blood cells of the economy. There's like the Fed is coming in. It wants to raise rates.

It talks about how the optimal situation would be at least a 1% increase, 1.5 million people laid off. You have investors who get sort of a sense of relief every time the labor market data comes in weak. Why is there this discomfort in a state of the economy, which on paper you'd think lots of spending, lots of reason to invest, do CAPEX good. That's everyone's investment to someone else's income.

Why is there this sort of like rebellion against that? Kaleetsky put it in, argued that it's purely political. He said that this, he argued in his famous article, political aspects of full employment, which I would recommend to anyone who doesn't know much. Kaleski is very, very easy to read. it's not a single equation. But he argued there, good.

He argued there, but, you know, there's no doubt that full employment is more rational for the system as a whole. It's more rational. Profits are higher. Employment is higher. Everything is better if you have full employment. However, full employment strikes at the high.

heart of another feature of capitalism which is the question of labour discipline. If you have a state of full employment then it's very it becomes difficult to discipline workers in the factory or in the office if a worker can leave his or her place of a place of employment. and immediately get another one, then where is the labour discipline? It's about control? It's really about the control of labour. And Kaleski argued that what would tend to happen is that in a state of full employment, you would get a political coalition put together by

major employers, the people in finance, central bankers, all of whom would argue that the situation is somehow manifestly unsound. Well, unsound in what way? Well, inflation. And sure enough, we have had inflation, but we also know at the moment that inflation is coming down quite rapidly as well because so much of the current inflation was simply an energy market adjustment to sanctions on Russian energy. So it's a kind of future inflation because the future inflation, because the future is unknown and unknowable. It's very, very easy to say,

oh, well, you know, things may appear okay at the moment, but, you know, we have these, these and these economists with all these models showing that there's some terrifying inflation around the corner. This kind of reminds me of the debate over work from home, which is, you know, post-pandemic, people started, working from home, and there didn't seem to be much of a hit on productivity, and a lot of companies still met whatever their internal benchmarks are. So then you had a lot of bosses who started

talking about a degradation of corporate culture and how, you know, it's bad. People are working from home. They might be doing okay on a pure numbers basis, but in the long run, it's going to impact the company by hitting culture. Yen, can you maybe connect more of what we've seen over the past year or two to Koleski's ideas. Do you think the post-pandemic maybe shift towards worker power has vindicated some of his ideas? I think it has. It's vindicated a lot of his ideas because it's actually weakened the the power of many businesses who particularly business, particularly business, in activities, retail, hospitality, these kinds of activities, which transport even, which just saw their markets shrinking quite drastically.

what then happened, however, was that the speed of the recovery as a lockdown was removed, I think a lot of those businesses took advantage of that situation to start raising their price. And my view is that they were raising their prices because many of them had got seriously into debt. many of them had found their political position weakened. They'd had to go knocking at the door of governments asking for loans, asking for tax rebates, various other public subsidies. Governments had responded by insisting on, no layoffs this kind of thing put companies particularly corporations into a difficult bind and a lot of them

got out of this by borrowing at record low rates of interest and then seeking to recover that borrowing by raising their prices so you have my my explanation of the inflation is is it would be twofold one is that you have this energy costs which is a temporary phenomenon but the other one is really the what Richard Coo referred to is it is a is a type of balance sheet effect where firms are trying to clear off debt by raising prices. And I think doing it, they were doing it quite successfully. But that then feeds into a narrative that all this is the consequence of full employment and therefore, you know, must be, must show that the state of full employment is financially unsound.

It isn't, of course, because the inflation has very little to do with what's happening in the labour market. Wage increases have lagged price increases. unions and workers in general have a much weaker position in the labour market. To some degree actually, individual workers are benefiting from labour shortages, but in terms of organisation, in terms of power in what call it called the power in the factories, workers still remain weak because worker organisations are weak. This is Caroline Hyde. And I'm Ed Ludlow inviting you to join us for Bloomberg Tech,

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but also really acknowledge where you don't and find people who can fill those gaps. Listen to Leading by Example, executives making an impact on the IHeart Radio app, Apple Podcast, or wherever you get your podcasts. So we just have a couple of minutes left, but I just want to, on the inflation question,

a term that you hear political activists, sometimes in the U.S., probably around the world, like greedflation. And I'm curious whether you think that's a useful frame. It kind of doesn't sound like it, listening, that, of course,

there are opportunistic situations and that for balance sheet reasons, corporations feel the impulse to, to raise prices. But like greed kind of seems like one of these things that's kind of immeasurable. I'm curious, like,

in your perspective, or Kletchke's perspective, like, is that a useful analytical mode? Personally, I wouldn't use the word the term greed, because it seems to me a kind of moralizing the fact that it's

business practice to get the best possible price for your output. I think there is a sense in which if you have excess capacity, the excess capacity may under certain circumstances cause a business to not to raise prices. to moderate greed. But on the whole, I think business decisions are not made on a kind of moral issue. You try to get the best out of the market. It's the nature of the system.

So one thing that I always like to ask economists who have written biographies of other economists or who have studied their work is, is there any area in which you disagree with Koleski or think that maybe, you know, maybe he got it wrong or maybe this particular theory could be improved or expounded upon. Yes, I think actually he, well, he, I think his political judgment, uh, sometimes was, uh, uh, went, went to skew for it. I mean, if I can give a, uh,

a particular example from the, from the United States, he thought that, uh, um, The student movement against the Vietnam War was headed for failure. And I think this was a misjudgment. He thought that American capitalism would be divided between, between the international capitalism, American multinationals, who would be much more sensitive to the way in which America is perceived abroad. And the, and domestic,

American businesses that are only operating within the United States, who would be, you know, who may be much more, I'm not sure that this is a distinction that works quite well in the United States. I think, I wish he, I regret that he didn't write more about money and finance because I think he, in this way he, it's, it's it's too easy to dismiss his ideas as being characteristic of the long period between 1929 and let's say the 1970s when you know really the stock market and finance were not terribly important and were in fact dependent on on state support. I think that the situation now is rather different and really needs more working on.

needs more working on. So I think this would be kind of my regret and my criticism. Plus the fact that I think he, he was an engineer and a feature of the type of economics of his time was that you had to, you won success in a profession by putting forward a neat mathematical model. Now, he knew that this wasn't enough. You had to have some kind of roots in the way in which the system operated. But, you know, he tended to believe that once he'd put forward the equation, then that was enough.

And I don't think it was. Jan Toprovsky, I'm afraid we're out of time, but that was fantastic. Really appreciate you coming on. And I feel like perhaps, you know, Cain's sort of got this revival after the great financial crisis. And it feels like with Kalechki's thoughts right now, as people wrestle with some of this thing, more people are going to be discovering him. So appreciate you coming out on odd lots. Thank you.

Thank you very much for this opportunity. Tracy, I really enjoy that. It does feel like, well, I mean, there's a lot there. The political aspects of the question you brought about working from home, the sort of rebellion against worker autonomy, worker power, what happens when it's really easy potentially to find another job? I think it's like, for one thing, that's like a pretty important idea right now. Oh, absolutely.

I also thought the question of why. So if you argue that, you know, private sector activity is dependent on the level of investment, but then why? Why does the level of investment change? Why is it more unstable than consumption? That is a question that comes up all the time here on Oblots, right? Like, why do these business cycles exist? Why do firms seem to, you know, potentially overreact to slow periods

and then overreact to more active periods? I don't know. Like, I think it's still open to debate, but it was definitely interesting to hear Koletsky's ideas on that. Yeah, and this idea that like, and, you know, know, Keynes, like, as, as, um, you'll point out, like, animal spirits, uncertainty, like, these are like, it's like vibes, you know? Right.

It's like, there is, I think vibes are important, but also, like, they're a little bit unsatisfying. You choose capacity utilization over vibes. Yeah, yeah. I mean, why do vibes change, right? That's like, if you're, if you sort of, like, lean too heavily into the vibes theory of economic cycles, then you have, then you're just moved down to the question of, like, well, why do vibes change?

And so some of these questions about, like, capacity. utilization. I do think they're helpful. I love like, I love the railroad example of like, okay, the problem is just keep building railroads, which you will maintain like full demand, but then you end up with 100 railroads. And this idea like this is the sort of like contradiction of the system is very interesting. Look, as a regular user of Amtrak, I say build all the railroads. Build all the railroads. Build them all. No, I am open to any and every possible explanation, or I should say policy suggestion for smoothing business cycles. And this was a fascinating one. Absolutely.

All right, shall we leave it there? Let's leave it there. This has been another episode of the OddBots podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me on Twitter at The Stallwart. Follow our producers, Carmen Rodriguez, at Carmen Armin and Dash Bennett at DashBot.

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