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Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Opinion | The spirit of Kalecki at Jackson Hole

The focus on imperfections in the real economybe it monopoly power or the decline in the bargaining power of workers or higher inequalityis welcome

The latest edition of the annual meeting of central bankers and economists held in the ski town of Jackson Hole had an unusual topic—changing market structure. The growing dominance of a few companies has become a hot button political issue across the world. The Jackson Hole crowd met to figure out the implications on monetary policy. I was surprised that there was no mention in the proceedings of a Polish economist who had tackled these issues many decades earlier. His name was Michal Kalecki.

Kalecki fans have often argued that he independently arrived at the same conclusions as Keynes did—and even earlier than the English economist. His misfortune was that he wrote in his native language rather than the global one. That is something for historians of economic thought to battle over. Among Kalecki's important contributions to economics is the way he linked macroeconomics, inequality and monopoly—the very theme of the Jackson Hole conference.

Here is Kalecki in a nutshell. First, he said that higher markups redistribute national income from workers to capitalists. 

Second, the extent of markups is determined by the degree of monopoly in the economy. In other words, the ability of firms to charge more than costs have deep macroeconomic consequences. The actual analysis is obviously far more complex but this very basic outline gives us an idea of how Kalecki anticipated some of the big debates of our times.

In his presentation at the Jackson Hole conference, John Van Reenen of the Massachusetts Institute of Technology touched on the key Kaleckian theme of whether higher market power as well as aggregate markups are a potential explanation for the falling share of labour in national income, sluggish productivity growth and an overall reduction in business dynamism. He remains sceptical that the rise of monopoly is because of the relaxation of antitrust rules in the developed world. Reenen believes that a more potent explanation is the rise of new businesses in which the winner takes all. Think of Facebook or Google.

Alan B. Krueger of Princeton University said in his speech that firms should be seen as active price setters in the labour market rather than passive price takers. The growing power of large firms has meant that the US wage growth has been weak despite low unemployment. He also argued that Milton Friedman had in his landmark 1968 speech on monetary policy actually hinted at the possibility that the natural rate of employment is partly determined by imperfections in the labour market—or that it falls as monopsony rises.

The key question is what the rising power of monopolistic firms means for monetary policy makers. There are clearly no firm answers as of now. Bank of England chief economist Andrew Haldane said in his speech that greater product market concentration is likely to affect both the shape of the Phillips Curve as well as estimates of the equilibrium interest rates, two key components of modern central bank policy models. A lot also depends on whether firms with the ability to keep down labour costs use the benefits to offer lower prices to consumers or go in for higher profits. The decision is obviously important for a central bank targeting inflation.

Krueger pointed out: “If explicit or implicit collusion among employers is an important source of growing monopsony power, allowing the labour market to run hotter than otherwise could possibly cause collusion to break down, because the benefit to an individual firm from raising pay while others are colluding at a fixed wage is greater when demand is greater. If the collusion does wither, wages and employment could rise." It would seem that a lot depends on whether market power leads to greater price flexibility, and thus reduces the costs of inflation control.

The Jackson Hole proceedings are interesting to read because they grapple with key issues such as monopoly power, labour market imperfections, and the nature of the balance between inflation and economic growth. 

The attempt to integrate inequality into monetary policy decisions is definitely interesting. As Kalecki had written in his 1954 classic, The Theory Of Economic Dynamics: An Essay On Cyclical And Long-Run Changes In The Capitalist Economy: “(The) relative share of wages in the value added is determined by the degree of monopoly."

Monetary policy thinking is in the midst of a welcome churn since the financial crisis struck a decade ago, in September 2008. Some of the debates have been extremely technical, but there have also been broader debates about the role of central banks, their relationship to elected governments, and how to balance the key task of inflation control with other goals.

There has been a lot of discussion on the impact of imperfect financial markets on monetary policy. The focus on imperfections in the real economy—be it monopoly power or the decline in the bargaining power of workers or higher inequality—is welcome. The right questions are in place. The right answers will hopefully follow.

Note: This is the link to an April 2014 piece by this columnist, on the economics underlying the inequality question: bit.ly/2NvD9K4.

Niranjan Rajadhyaksha is executive editor of Mint.

Comments are welcome at cafeeconomics@livemint.com. Read Niranjan’s previous Mint columns at www.livemint.com/cafeeconomics

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