Employment: The Neglected Variable

Today, the issue of employment receives attention in public discussion mainly because of NREGA. It is economic growth or GDP growth which is given prominence in most policy documents. In economics, employment generation and related aspects form a part of macroeconomics alone. Financial economics, international trade, monetary economics, etc hardly comment on the issue of employment. Increasingly, the question of employment is getting less attention in most academic and policy oriented discussions. This post attempts to revive certain issues pertaining to employment. For this purpose, we revisit the 1943 paper of a neglected macroeconomist – Michal Kalecki. His paper straddles the fields of industrial economics, financial economics, public economics and macroeconomics, and provides insights regarding employment generation.

The generation of more employment, rather full employment, according to Kalecki, is beneficial to both government and capitalists. In addition, it also benefits the class of workers. Employment can be generated by capitalists or by the government. However, the government is restricted from generating employment because apparently government investment crowds out private or capitalist investment. In Kalecki’s words:

“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, etc. 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.”

It is for this purpose that we have Acts such as the FRBM Act to ensure sound finance. This Act regulates and limits the employment generation capacity of the government. As for the corporate sector, they never support public investment. Hence, the employment generating capacity gets solely determined by the corporate sector/capitalists.

Kalecki questions this stance of the capitalists. For, full employment, as noted above, clearly benefits the capitalists by providing them greater profits. He argues that it is the “political realities” associated with the maintenance of full employment which prevents the government and big business or capitalists from doing so. Given that the Government has to adhere to sound finance, largely, the capitalists determine the volume of employment in an economy. The capitalists tend to increase employment and output if they expect a good economic and political environment to be forthcoming. This environment is a dynamic and complex function of government policies, international events, political outcomes, etc. In economics, we call it state of confidence. Today, one factor which reflects this state of confidence is the bullish trend seen the stock markets. It is for this reason that, in India, SENSEX occupies such an important place in everyday news. Hence, the state of confidence assumes such an important role only in an economy where the government is supposed to maintain sound finance. As Kalecki points out:

“The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the ‘state of confidence’.”

Similarly, on the politics involved in capitalists pressing for sound finance, Kalecki powerfully notes that:

“Under a laisser-faire system the level of employment depends to a great extent on the so-called level of confidence. If this deteriorates, private investment declines, 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 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.”

Thus, regardless of whether we agree with Kalecki or not, he provides an interesting way to examine the issue of employment creation; especially for the Indian economy where FRBM Act is taken seriously and because of the growing significance of SENSEX. Such an analysis also calls for greater interdependence between macroeconomics, public economics, industrial economics and financial economics on one hand and between economics, political science, sociology and culture studies on the other. The latter sort of interdisciplinary inquiry will provide descriptions of actual processes by which such “politics” take place. This analysis by Kalecki also revives the classical notion of “political economy” which understands that economics cannot be divorced from politics. For practical purposes, it is of utmost importance that we pay more attention to the variable – employment, in our economics curricula and debates, especially in a country like India.

References

Kalecki, Michal (1971), ‘Political Aspects of Full Employment’, in Selected Essays on the Dynamics of the Capitalist Economy 1933-1970, Cambridge: Cambridge University Press. (full text available at Monthly Review)

Further reading

Bhaduri, Amit (2006), ‘The Politics of Sound Finance’, Economic and Political Weekly, 4 November.