Friday, April 15, 2016

Kalecki's Fable

By Jan Toporowski (Full paper published by ROKE here)

Following the death, in 1935, of the Polish military dictator Józef Piłsudski, his regime continued under a group of his military cronies, known as the ‘colonels’, who increasingly modeled their regime on that of Mussolini in Italy. One of the colonels, who was responsible for economic development, wanted to understand the economic principles behind government stabilization. He called in Kalecki's colleague from the Institute for the Study of Business Cycles and Prices (Instytut Badań Konjunktur Gospodarczych i Cen), Ludwik Landau, to explain the principles behind the ‘new economics’. Landau had just been fired from the Institute and was now working at the national statistical office, Główny Urząd Statystyczny (see Kalecki 1964 [1997]; Landau 1957).

Landau explained at length the principles of effective demand and credit cycles underlying levels of output and employment at any one time. The colonel had evident difficulty in grasping this. So, finally, Landau explained by telling the following story:
In an impoverished Jewish shtetl in Eastern Poland, whose residents were mired in debt and living on credit, a wealthy and pious Jew arrived one day and checked into the local inn, taking care to pay his hotel bill in advance. On Friday, to avoid breaking the Sabbath injunction against carrying money, he handed over to the inn-keeper for safe-keeping a $100 note. Early on Sunday, the wealthy and pious Jew left the inn before the inn-keeper had had a chance to return the banknote.

After a few days, the inn-keeper decided that the wealthy Jew was not going to return. So he took the $100 note and used it to clear his debt with the local butcher. The butcher was delighted and gave the note for safe-keeping to his wife. She used it to clear her debts with a local seamstress who made up dresses for her. The seamstress was delighted, and took the money to repay her rent arrears with her landlord. The landlord was pleased to get his rent at last and gave the money to pay his mistress, who had been giving him her favours without any return for far too long. The mistress was pleased because she could now use the note to clear off her debt at the local inn where she occasionally rented rooms.

So it was that the bank-note finally returned to the inn-keeper. Although no new trade or production had occurred, nor any income been created, the debts in the shtetl had been cleared, and everyone looked forward to the future with renewed optimism.

A couple of weeks later, the wealthy and pious Jew returned to the inn, and the inn-keeper was able to return to him his $100 note. To his amazement and dismay, the wealthy Jew took the note, set fire to it, and used it to light his cigarette. On seeing the inn-keeper's dismay the wealthy Jew laughed and told him that the banknote was forged anyway.

Landau finished his story and waited for understanding to seize the colonel. Beads of sweat appeared on the colonel's forehead, from the intellectual effort at comprehension. Finally, as if he had stumbled on the explanation, the colonel exclaimed: ‘Ah, I knew from the very beginning that there was something wrong with that Jew. Of course, the money was forged!’
Kalecki's conclusion from this was that unfortunately too many people think like the colonel, and very few people understand the story as we do.

References:

M. Kalecki, '‘Ludwik Landau – Economist and Statistician’', in J. Osiatyński , Collected Works of Michał Kalecki Volume VII, Studies in Applied Economics 1940–1967, Miscellanea, (The Clarendon Press, Oxford (1964 [1997])) 325-329.

L. Landau, Wybór Pism, (Państwowe Wydawnictwo Naukowe, Warszawa 1957).

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