Populism in the United States has its roots in the mass protests of the 1880s and 1890s, sparked by the economic depression that gripped the country following Reconstruction. American populists rallied to the banner of William Jennings Bryan, the Democratic candidate for the presidency in 1896, who expressed the populists’ distrust of cosmopolitan elites and international finance in his famous “Cross of Gold” speech. At the Democratic National Convention in Chicago that year, Bryan launched an impassioned criticism of the gold standard, behind which, he alleged, lay the interests of the old colonial power, England, and the moneyed classes on the East Coast. Never one to let a good act go unplayed, Bryan would repeat his rousing conclusion to mass applause whenever he could: “Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”1

Bryan offered commercial and laboring interests bimetallism (the use of silver, in addition to gold, in coinage) as a solution to what appeared to be a shortage of money in a country oppressed by debt and deflation. He was the last effective hope of the old People’s Party, which organized resistance to railroads and banks in rural areas where indebted farmers were losing their land in the face of falling agricultural prices. When Bryan lost the presidential election to William McKinley, the hopes vested in a simple monetary solution to the complex problem of economic depression were also defeated.

Nevertheless, the growing contrast between the new capitalism of massive corporations—characterized by dominant monopolies and cartels and backed by growing financial markets—and the moralistic, entrepreneurial ideal of classical capitalism that inspired American free enterprise, ensured that “populist” economic critiques did not disappear. Indeed, some of the most innovative economic thinking of the ensuing decades grew out of this tradition. One of its most insightful figures was Michał Kalecki, who remains largely forgotten today. Kalecki’s work on cartelization, financialization, and the causes of economic stagnation illuminates many of the same problems we encounter in the present moment, and merits fresh consideration.

Veblen’s Contributions to Populism and Economics

A more lasting intellectual legacy of the populists is found in the work of Thorstein Veblen—most notoriously his sly, sardonic Theory of the Leisure Class (1899). Its style applies to social criticism the satire more commonly found in the novels of William Thackeray or Anthony Trollope. It engages the reader by imitating the faux naive simplicity of everyman in puncturing the pretensions of the sophisticated, leisured, conspicuously consuming urban elite.2 But Veblen expressed the economic attitudes of populism most starkly in his book The Theory of Business Enterprise (1904), a blistering critique of big business. This was one of the first books to analyze the economics of a capitalism dominated not by the calculating entrepreneur of romantic myth and economics textbooks, but by the large corporations whose affairs and scandals were uncovered by the Industrial Commission in the early years of the twentieth century. The commission had been appointed by McKinley in 1898 in response to the populist mood in the country at large. It revealed that the leading industrialists of the day, men like Andrew Carnegie, Cornelius Vanderbilt, and John D. Rockefeller, who claimed to have become rich by relentless industrial innovation and business efficiency, actually had done so through manipulating the capital markets.

In his book, Veblen described business as ultimately condemned to stagnation because competition for work kept wages, and therefore mass consumption, low. The stagnation was only broken by occasional speculative booms in the stock market, periods when “captains of finance” deluded themselves that bubbly financial markets were real, only to be confounded eventually by the reality of limited mass consumption. Wars, such as the Spanish-American War of 1898, which created a run on armaments and military equipment financed by government debt, were another source of debt-fueled speculation.3 In what might have seemed like a confirmation of Veblen’s thesis, the Knickerbocker Trust Company of New York collapsed in October 1907, shortly after the book’s publication. The crisis that followed resulted in the establishment of the Federal Reserve System in 1913, which was supposed to put an end to financial crises—but obviously didn’t.

Despite its apparent prescience, Veblen’s book never achieved the eminence of his earlier work on the leisure class. But its exposition of corporate finance was hugely influential among early writers on money and finance. Irving Fisher drew the most important ideas in his Debt-Deflation Theory of Great Depressions from Veblen.4 John Maynard Keynes featured the book in reading lists for his lectures at Cambridge.

Academic economists of the time presented their business school audiences with a mythical image of capital markets, in which the savings of the provident were applied by those markets to the most productive investments. Yet Veblen, Keynes, and the keener observers of corporate finance—like the then-editor of the Economist Hartley Withers and the popular writer John A. Hobson—knew that capital markets were the peculiar financial result of business corporations and the credit system in which they operated. The peculiarity of those markets lay in their trading of long-term financial instruments, which assured financing at a fixed cost for corporations, and allowed them to build up monopoly power through buying up the shares and long-term debts of other corporations. Hobson is best known for his 1902 classic Imperialism: A Study, which Lenin admired. But his imperialism is essentially the political expression of international finance, frustrated by the absence of investment opportunities in depressed industrialized countries, much like the haute finance of another critic of capitalist cosmopolitanism, Karl Polanyi.5

Hilferding’s Critique of Corporate Capitalism

In Europe the new capitalism of corporations was studied by Rudolf Hilferding, who presented a much more systematic account of the economic and social impact of the new industrial behemoths. He called their harnessing of long-term financial markets for the purpose of corporate enrichment “finance capital,” which became the title of his most important book. Hilferding was a Marxist who first came to prominence among Austrian Social Democrats in 1904, with a vigorous defense of the labor theory of value against the criticism of Eugen von Böhm-Bawerk. In 1910, he published his book Das Finanzkapital: Eine Studie über die jüngste Entwicklung des Kapitalismus to wide acclaim among German and Austrian Marxists. The significance of the book, however, goes far beyond Marxist doctrinal disputes or the lending practices of Berlin clearing banks, for which it is best known. Of more lasting importance, Hilferding put forward two fundamental ideas about the operations of corporations and finance that place him among the founders of the modern theory of the business cycle and twentieth-century macroeconomics.

The first idea was the notion that rates of profit for different firms vary according to their monopoly power and membership in cartels—collusion to fix prices being the standard way in which firms deal with “excessive” competition in difficult business conditions. Noncorporate businesses—the small and medium-sized enterprises that embody, much more than bureaucratic corporations, the entrepreneurial spirit of capitalism—are disadvantaged by such monopolistic practices. In any given market, the bulk of profits are swept up by large corporations, leaving smaller firms with marginal leftovers, or even losses. In the course of a business cycle, corporations therefore benefit disproportionately during the boom, while smaller firms suffer the greatest business casualties during the recession.

Hilferding’s second idea was the role of international finance in creating markets in the colonies, or developing countries, for the large corporations. This use of international credits and loans to finance the export of capital was an additional way in which big business stabilized its operations and finances. Hilferding pointed out that this greater relative stability of the corporate sector is the incentive for other firms to join cartels. There is even a hint that, eventually, when all capitalists have joined a “general cartel,” capitalism will be stabilized.6

This last possibility aroused the greatest controversy among European followers of Marx. If capitalism could indeed be stabilized through the coordination of business activity, then the prospect for the economic breakdown of capitalism, which was supposed to make socialism inevitable, would disappear. Hilferding himself rejected any such inevitability as condemning socialists to merely waiting for the next stage of history to emerge. Yet when the catastrophe of the First World War was followed by extreme shifts in European economic activity, economists in “Austro-Marxist” circles started to question the possibility of capitalist stabilization.

Kalecki and Keynes

On the fringes of these discussions, in newly independent Poland, was a young Polish business journalist, Michał Kalecki. He understood business because his father was a small factory-owner in the Polish manufacturing capital of Łódź, whose business had been ruined in the course of the 1905 Revolution (the rehearsal for the Russian Revolution of 1917). The young Kalecki, born in 1899, was forced to give up his engineering studies after his military service in the Russo-Polish War of 1920, and had turned to business journalism to earn a precarious living. Perhaps no one understood credit cycles and corporate capitalism better than this Polish journalist. He scoured the business and financial press for information not only about markets, but also about the corporations, banks, and smaller enterprises that made the economy work.

By the 1930s, Kalecki found himself in the intellectual orbit of Ludwik Krzywicki, a Polish Marxist economist, who is known today (if at all) for his work on agricultural economics. Krzywicki was one of the first generation of Polish Marxists (he had been born in 1859). In 1893 he spent six months in the United States and even visited Chicago to see the World’s Columbian Exposition, showcasing American industrial achievements to commemorate the four centuries since Christopher Columbus’s discovery of America. Krzywicki returned to Poland impressed by the technological dynamism of U.S. industry, but aware too that the new industrial giants were systematically eliminating the competition on which capitalism depended for its dynamism.7

Because of the similarities in their economic theories, Kalecki is commonly associated with the older, more upper-class British economist John Maynard Keynes. But there were important differences. Keynes, who was notoriously prone to believing that a boneheaded unwillingness to listen to his advice was all that stood in the way of human happiness, regarded business as benign, though overly cautious. Kalecki, by contrast, echoed the old populist suspicion of big business, but in a much more systematic way.

The contrast between the two is very apparent in their respective views on one of the more colorful business heroes of the interwar period, Ivar Kreuger. In a world where all governments had difficulties making payments on the debts that they had incurred in prosecuting the First World War—debts that the Treaty of Versailles had secured on German reparations, which the German government could not pay—Kreuger specialized in buying up and canceling the bonds of indebted governments, in exchange for monopolies on the sale of matches. These purchases were financed by share issues of his companies in the New York market. With the collapse of that market in 1929, Kreuger had increasing difficulty providing the security that his bank creditors demanded. On hearing that the Economist magazine was about to reveal that he did not possess the necessary collateral, on March 12, 1932, he shot himself through the heart in his Paris apartment.

In a note on Kreuger for a short-lived socialist periodical, the Przeglad Socjalistyczny (Socialist Review), Kalecki recounted the financier’s role in “facilitating the international circulation of capital, which was always lagging behind the development needs of the postwar capitalist world.” Yet he also pointed out Krueger’s business strategy of monopolizing the world match market, to the point where only the United States, France, and the Soviet Union had markets beyond his control. Matches may seem an odd vehicle for the extraction of monopoly profits, but Kalecki pointed out that their markets were relatively immune to business cycles, because of the low price of matches in relation to household income. Kreuger’s business empire was compromised, in Kalecki’s view, by a loan of $125 million which he gave to the German Treasury at the end of 1929 in order to secure a ban on imports of matches from the Soviet Union into Germany. Nevertheless, Kalecki was clear about Kreuger’s role in the evolution of capitalism, a progression that depended on institutions rather than the individuals who cast themselves as the heroes in the economic drama: “The functioning of capitalism depends not on the nature of individual foremen who control its mechanisms, but on the structure of those mechanisms.”8

Kalecki’s view, in which Kreuger’s career was merely an epiphenomenon of institutional dynamics, contrasted with that in the business press generally, and in the financial markets, where it was believed that Kreuger was the heroic victim of market pressures. The Economist reported the financier’s death as “the veritably tragic wreck of a career which in its sphere was unsurpassed by that of any individual in living memory . . . a force for good” crushed by the bleak circumstances of his time.9 Even Keynes, who was willing to concede that operators on the New York Stock Exchange possessed “a gangster mentality,”10 saw Kreuger as a “tragic” victim of the liquidity preference and endowed his career with moral significance:

[He was] perhaps the greatest constructive business intelligence of his age, a man whose far-flung activities have been in the widest sense in the public interest, who had conceived it his mission in the chaos of the post-war world to furnish a channel between countries where resources were in surplus and those where they were desperately required, one who built on solid foundations . . . crushed between the ice-bergs of a frozen world which no individual man could thaw and restore to the warmth of normal life. The spectacle of capitalists, striving to become liquid as it is politely called, that is to say pushing their friends and colleagues into the chilly stream, to be pushed in there by some more cautious fellow from behind, is not an edifying sight.11

Keynes had no doubt who was to blame: “There is nothing in the world like the cruel and cold-blooded beastliness of the American bankers.”12

A Contrarian View of the Great Depression

By the time Krueger committed suicide, the world was already well into the depression that followed the 1929 crash. In general, most economists lined up behind an orthodoxy that stressed the importance of the price mechanism in stemming the rise of unemployment. If wages were falling, then eventually labor would become so “competitive” that firms would start to employ labor again. This was neatly expressed in the words that Herbert Hoover attributed to Treasury secretary Andrew Mellon, whom Hoover had inherited from his predecessor Calvin Coolidge:

Liquidate labor; liquidate stocks; liquidate farmers; liquidate real estate . . . it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted and enterprising people will pick up the wrecks from less competent people.

Hoover’s memoirs, published in 1952, are usually cited as the source for this succinct statement of the bracing, morally therapeutic case for economic misery. In fact the term “liquidationism” was already in use by then to describe a government policy of providing minimal amelioration while awaiting the equilibrium that the price mechanism was supposed to achieve naturally in markets. Its chief proponents were Austrian economists like Friedrich von Hayek and Joseph Schumpeter, and American economic liberals like Henry Simons in Chicago. If only governments would stop trying to stem the fall in prices and wages, the “malinvestment” caused by government interference in those markets would eventually be eliminated, and economies would get back to their “natural” condition of full employment.

In Europe, the country most badly hit by the Great Depression was Poland: it suffered the largest percentage increase in unemployment and the greatest percentage decline in industrial output. In 1933, Kalecki published in Polish his explanation of why economies went through successive phases of growth and recession, and why an economy may end up trapped in a depression, regardless of how much “freedom” is given to market forces. This is because, in any given period, actual employment and total production depend not on the ability of prices to converge to levels (intrinsic to our tastes, preferences, and resources) that will make supply equal to demand in all markets, but on the total volume of investment in infrastructure and industrial equipment that is undertaken in that period. That investment is essential because it then determines how much profit firms can realize. Indeed, without capitalists’ spending on their own consumption, and on investment, capitalists cannot turn a profit: just selling goods and services to their workers can at best enable employers to recoup the money that they have paid their workers as wages, and thus cover their wage bill. To realize profits, businesses need to invest and capitalists need to consume.

In his prewar journalistic writings, Kalecki would often explain the complexities of such economic relationships by means of parables. Perhaps the most effective one was his railway example:

Let us assume, as often happens in the USA, that two competing railway lines run between two cities. Traffic on both lines is weak. How does one deal with this? Paradoxically, one should build a third railway line, for then materials and people for construction of the third will be transported on the first two. What should be done when the third one is finished? Then one should build a fourth and a fifth one. . . . This example, as we warned, is paradoxical, since unquestionably it would be better to undertake some other investment near the first two railway lines rather than build a third one; nevertheless, it perfectly illustrates the laws of development of the capitalist system as a whole.13

The practical problem, in such circumstances, is that firms are discouraged from investing by the existence of unused capacity in the factories that they already have. New investments are usually undertaken only when new capacity is required—that is, once existing capacity is fully utilized:

We very often encounter the argument against building new factories while the old ones are still unemployed. This simple truism shares the fate of many of its fellows—it is false. In order for existing capital equipment to be fully employed, it must be continually expanded, since then accumulated profits are invested. If they are not invested, profits fall and, along with the fall in profits, there is a decline in the capacity utilization of existing factories.14

Kalecki concluded in dramatic style: “We can see that the question, ‘what causes periodic crises?’ could be answered shortly”:

the fact that investment is not only produced, but also producing. Investment considered as expenditure is the source of prosperity, and every increase of it improves business and stimulates a further rise of investment. But at the same time every investment is an addition to capital equipment, and right from birth it competes with the older generation of this equipment. The tragedy of investment is that it causes crisis because it is useful. Doubtless many people will consider this theory paradoxical. But it is not the theory which is paradoxical, but its subject—the capitalist economy.15

For these reasons, Kalecki was scathing about the “brains trust,” mostly professors from Columbia University, who advised Franklin D. Roosevelt on economic strategy in the first days of his presidency:

The “brains trust” has the ambition not only of stimulating a business upswing but also of initiating a new “capitalist-planned” era in the history of the United States. These ideas are striking in their over-simplicity and lack of understanding of the mainsprings of the capitalist economy. “Planning” here boils down mainly to forming cartels to combat “ruinous competition” and prevent “over-investment.” It is easy to show that this primitive idea of planning will not stand up to analysis. Cartels warding off ruinous competition will earn profits; but for these profits to be realized, investments must be made, since the total profits of capitalists equal the sum of their consumption plus their investments. If cartels can achieve profits while not investing, the only reason is the existence of non-cartelized industry, part of whose assets cartels directly or indirectly appropriate. However, if the entire economy were made up of cartels, then obviously they could not achieve large profits without making large investments. If they refrain from investment, then this should lead to the contraction of profits which, with inflexible prices, would result in reduced sales.16

In this sense then, corporations, monopolies, and cartels are parasitic upon a non-cartelized sector of small and medium-sized retail and industrial enterprises, farms, and so on. The profits from their individually modest investments accrue disproportionately, through the functioning of the markets, to the corporations that dominate those markets. The losses of the smaller businesses have to be covered from their reserves or by borrowing. In this way their inconsiderable savings pass into the possession of those corporations, whose accumulations of liquid assets (bank deposits) are backed ultimately in bank balance sheets by the mounting debts of the smaller businesses.

Here too was Kalecki’s answer to Hilferding’s hint at the possibility of stabilization of the economy by means of a “general cartel,” coordinating prices and production in the economy as a whole, while retaining the profit motive as the key incentive to production. Kalecki had earlier criticized the notion that cartels had a stabilizing influence on the business cycle. In fact, he argued, such price coordination makes cycles more extreme: in the boom, cartel members tend to overinvest, because their production quotas in the cartel are usually related to their productive capacity; in the recession, cartel members can still squeeze out profits from their market and this prevents them from shutting down their unused capacity, whose elimination is the precondition for firms to start investing again. In this way, booms are augmented and recessions prolonged by the existence of cartels.17

The Politics and Financing of Full Employment

In 1936, Kalecki came to Britain on a fellowship from the Rockefeller Foundation. With the emergence of authoritarian governments in continental Europe, including Poland after the military coup of Józef Piłsudski in May 1926, and the increasing belligerence of Nazi Germany, the foundation provided a lifeline to many intellectuals whose political circumstances were making their lives difficult. In Britain, Kalecki was introduced into Keynes’s circle by Joan Robinson. Keynes was impressed, sometimes even frustrated, by the younger man’s analytical abilities. But they both agreed that the dire weakness of business investment, which was the cause of the economic depression, would be overcome by a “synthetic” boom based on fiscal stimulus. This was what inclined them both to support the fiscal policy of Roosevelt’s New Deal. For Kalecki, a fiscal deficit has the merit not only of expanding demand in general. It also provides a market for the private sector that does not have to be paid for by the private sector, in the way in which businesses have to pay their workers if they are to sell their goods to their workers, or pay for investments so that firms in general can accrue profits. In this way, a fiscal deficit increases the revenues and profits of the private sector.

Kalecki had very clear views on how such an economic stimulus should be financed. Ideally, it should be done by borrowing, thereby mobilizing the unused financial reserves of the corporations whose inactivity was the cause of the economic depression. But if there was political pressure to balance the books of the government, this stimulus could most effectively be financed by means of a wealth tax, taking money away from the rich in general, and returning it to business as profits, through the expenditure of those who are employed by the government or receive government welfare payments. As he argued, such taxation “has all the merits of financing the state expenditure by borrowing, but is distinguished from borrowing by the advantage of the state not becoming indebted.”18 Kalecki was not alone in advocating such a “capital levy.” Keynes was a keen supporter of this fiscal measure, along with Joseph Schumpeter and John A. Hobson, with endorsements going back two centuries to David Ricardo.

Kalecki recognized that such solutions, however rational, challenged what he called “the power of capitalists in society.” He did not expect them to welcome full employment, which undermined that power. His explanation of the power of big business is striking:

Under a laisser-faire system, the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall in output and employment. . . . This gives to 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 level of employment dependent on the “state of confidence.”

The “captains of industry,” therefore, would readily find “prominent so-called ‘economic experts’ closely connected with banking and industry . . . to declare that the situation was manifestly unsound,” usually because of some prospect of inflation or the “burden” on the economy of government debt.19

The Cold War and Vietnam

In 1945, Kalecki left Britain to work in the International Labor Office in Montreal. In the following year he moved to New York to write economic reports for the United Nations Secretariat. With the advent of the Cold War, however, the climate of international relations and economic debate deteriorated, and it also poisoned his work in reporting on developments in the Communist bloc. In 1955 he resigned from the UN and returned to Poland, where he advised the government on economic planning.

Kalecki became deeply critical of the way in which full employment was now being secured in the United States and other capitalist countries. He argued that they were increasingly reliant upon the buildup of armaments and the saber-rattling of international diplomacy that was supposed to justify this buildup. Kalecki called the new development “military Keynesianism” and pointed out that the high employment created was at the expense of consumption and nonmilitary technological innovation. It was no coincidence that technological leadership in civilian applications during the postwar period was achieved by Japan and Germany, the two countries that were forbidden from reconstructing their arms industries. Countries that could reach high levels of employment by producing and selling arms were less likely to improve their industries serving more civilian needs.20

In the 1960s, as the scale of the American intervention in Vietnam increased, so too did Kalecki’s criticism of the U.S. government’s equivocations over employment and social policy. In one comment, characteristically entitled “The Fascism of Our Times,” he pointed out that a new business elite, devoted to laissez-faire and small government, was seeking to undo the reforms of the New Deal and to push back the growing support for equal rights for African Americans. By 1967, he noted that the United States was undergoing a full-scale armaments boom, counterbalancing the easing in private sector investment:

It is military expenditures that now become the motive force of the business upswing as they increase. . . . The increase in military expenditure constitutes one-half of the increase of national product. . . . To sum up, a typical war (or semi-war) boom started only in the second half of 1966.21

Kalecki detected among members of the “old” business elite a certain embarrassment at the war in Vietnam, as it contributed to a decline in U.S. influence in Europe, where the older elite had business interests. On the other hand, the American labor movement was largely quiescent and satisfied with growing employment and real wages. The anti-war movement in the universities was active, but it was “a rather thin stratum of society in the USA without much political weight. It is possible that this awakening of the intelligentsia is important for US political developments in the longer run, but it cannot have a major significance for stopping the war in Vietnam.” He considered the possibility that “groups of ‘old’ big business associated with the east coast might play a role in the war in Vietnam comparable to that that de Gaulle played in terminating the Algerian war.” But “it is a sad world indeed where the fate of all mankind depends upon the fight between two competing groups within American big business . . . many far-reaching upheavals in human history started from a cleavage at the top of the ruling class.”22

In the following year, 1968, Kalecki and his circle fell victim to factional infighting within the Polish ruling party, to which he had never belonged. The infighting gave rise to a purge of Jewish survivors, by then concentrated in the professions and the upper reaches of the Polish establishment, since most Jews who remained in Poland after the war had left for Israel after 1948. Kalecki was already in poor health. He resigned his government positions in solidarity with his fellow citizens of Jewish descent. In 1969, he made one last visit to Cambridge, England, where three decades earlier he had worked with Keynes. He died in the following year.

Kalecki’s Relevance Today

American populism dates back to the economic depression that followed Reconstruction, and the failure of the economy to secure the economic and social positions of farmers and urban workers. The new corporations promised to revive industrial prosperity, but enriched mostly their owners and bureaucrats. The work of the Polish economist Michał Kalecki is the link between the early populists’ critique of the first massive corporate forms and the Keynesian revolution, and his insights can help inform the new economic thinking required to understand the industrial under-performance of America today.

Kalecki showed how the large industrial-financial corporations are neither efficient, nor innovative, nor conducive to growth and entrepreneurship. If industries are in decline, then what is needed is an examination of where demand for their products comes from. In the case of America’s rust belt, the demand for its products comes from construction and investment in industry and infrastructure. It is that investment that needs to be addressed in order to revive declining industries. The tax system needs to target the “over-saving” or “financialization” of American corporations: their accumulation, on an unprecedented scale, of liquid assets that are turned over in the financial markets rather than in real business activity. Whether spent by the government on public services, or through enhanced industrial investment by those corporations, the money mobilized in this way will return as profits to business, creating employment along the way, rather than sterile arbitrage in the financial markets.

This article originally appeared in American Affairs Volume II, Number 2 (Summer 2018): 35–50.

Notes