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THE KALECKI-STEINDL THEORY OF FINANCIAL FRAGILITY Jan Toporowski SOAS University of London, and the Research Centre for the History and Methodology of Economics, University of Amsterdam Paper presented to the ‘Crisis in Financialisation’ Conference at the School of Oriental and African Studies, University of London on 30 May 2008 Abstract Kalecki and Steindl modelled the financial fragility ofcompanies through a circular flow of income analysis, extending the treatment of inter-sectoral flows that Marx put forward in Volume II of Capital to include: household saving as a leakage from firms’ revenues; and firms saving representing the financial accumulation of capitalist firms. Household saving causes financial fragility by reducing that financial accumulation. In Kalecki, this relationwas put forward as an element in the ‘trend’ of economic development. Steindl made it of more immediate macroeconomic concern because it induces ‘enforced’ indebtedness among companies. The paper extends this analysis by showing how recent capital market inflation may have reduced this source of financial fragility, albeit at the expense of the indebtedness of households.

Introduction This paperis a contribution to economic methodology, history of economic thought, and the analysis of current financial developments. It shows how economic concepts can be refined and developed beyond their original purpose for use in a better understanding of economic developments with which the original authors of those concepts could not have been familiar. It traces the origins of household saving as afactor in the macroeconomics of Kalecki through to its role in precipitating financial crises. Finally, the paper shows how in circumstances of asset inflation, the role of household saving changes. The paper is structured as follows. Section 1 presents the role of household saving in Kalecki’s business cycle theory. Section 2 shows how Steindl created a theory of financial fragility out ofhousehold saving. Section 3 shows how asset inflation reduces household saving and thereby shifts financial fragility from the firms sector to the household sector.

1

1. Household saving in Kalecki’s analysis. Kalecki’s analysis is based on the reproduction (or as we would nowadays call them, circular flow of income) schemes put forward by Marx in Volume II of Capital. In his analysis, Marxargued that surplus value is turned into money by the expenditure of capitalists: ‘… it is the capitalist class itself that throws the money into circulation which serves for the realisation of … surplus value incorporated in … commodities.’ (Marx 1974, p. 338). Whereas Marx emphasised capitalists’ consumption as the way in which capitalists ‘realise’ their surplus value, Kalecki was able to show thatthe realisation of profit was chiefly done through capitalists’ expenditure on investment, as well as their expenditure on their own consumption. (Marx’s analysis, and its link with that of Kalecki is most clearly discussed in Trigg 2006, pp. 22-28). This can be easily shown as follows. According to the standard national income identity, in any given period, total national income (Y) is equal toconsumption (C) plus gross fixed capital expenditure, or investment (I), plus the fiscal deficit, plus the trade surplus. Saving (S) is then equal to Y – C, which is then equal to investment, plus the fiscal deficit plus the trade surplus. Abstracting away from the fiscal surplus and the trade surplus, and in an economy in which there are only capitalists and workers, saving and consumption can bedivided up into the saving and consumption respectively of capitalists and workers: C = Cc + Cw So that: Y – C = S = S c + Sw = I (1) ; and S = Sc + Sw

The surplus or profits of capitalists (P) is also, by definition, equal to their expenditure on their own consumption (Cc) plus their saving (Sc): P = C c + Sc Since, by (1) above, capitalist saving is equal to their investment expenditure...
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