Kalecki’s Long-Run Theory of Effective Demand: The Trend and Business Cycles

In 1933, when constructing a macrodynamic business-cycle model, Kalecki’s purpose was to explain observed cycles with a macroeconomic theory capable of mathematical expression, leading to a dynamic system whose solutions are endogenous, deterministic cycles of constant amplitude. In substance, the demonstration of the intrinsic instability of capitalist economies was at stake. With this purpose in mind, using a linear mixed difference and differential equation, Kalecki tried to show at the 1933 Leyden meeting of the

Econometric Society

that this aim had been reached, showing in particular that his system gave rise to a cyclical solution of constant amplitude for a special value of the parameters. But,

Alas, Frisch was there to point out that since the Greeks it has been accepted that one can never say an empirical quantity is exactly equal to a precise number. Given his aim, this was a deadly blow to Kalecki […]. (Goodwin 1989, in Sebastiani 1989: 249–250)

Owing to the remarks he received, Kalecki afterwards temporarily accepted Frisch’s Swinging System approach whereby the economy has a natural tendency to reach a stationary equilibrium and cycles occur due to exogenous shocks. Pushing momentarily into the background the demonstration of the intrinsic instability of capitalist economies, he thus centred his efforts on the explanation outlined in the conclusion of his 1934 article “Three Systems” (Kalecki 1934a [1990]).