Jan Toporowski Explains Why Capitalists Dislike Full Employment

what I say. I really appreciate that. Secondly, I think what I said is it feels really weird that you have a central bank, specifically the Federal Reserve, that is saying basically that they want to push the unemployment right up. Yeah, and significantly. Right. So we're at round three and a half percent unemployment right now fifty which sounds great. That seems unambiguously good, and especially you know, after coming after

years of slow labor market growth. Um, some of the fears during the worst of the COVID pandemic about how how much unemployment there is, and yet here we are, and it's almost always talked about as a problem to be solved rather than an opportunity to be embraced. Yeah, there's always concern that you're running an economy too hot if employment gets too low, But then that just brings up all these really big picture questions about well, what

is the economy for anyway? Shouldn't we be aiming for a system that kind of works for everyone where you know, hopefully the unemployment rate is very very low. But I guess the risk is and the concern is that you don't want to run it in such a way that it starts pushing up prices and you get this unrelenting inflation, right, and inflation is bad and people, it hurts people, and

people don't like it. But nonetheless, I think people find it strange that the central bank is part of what they see as an outcome of optable monetary policy would put so many, you know, at least another million to have people out of work. They find it's strange when weak labor market data often leads to a stock market railly right, the whole bad news is good news for

stocks perverse. And you know, you think, like, Okay, a lot of people have jobs, that means a lot of spending, corporate profits really high, Like do you think these are like good things? And yet at some level it's like all of this is bad, and I do and I think like we shouldn't just jump away from that, like we shouldn't sort of move on. And of course there's a room to discuss soft land things and all that, but some of these route questions I think are still

worth out thinking about, Like why do investors hate full employment? Yeah, yeah, exactly right. So I'm really excited about our guests. So one of the one of the economists from the old days that people sometimes talk about when they're talking about the political economy of full employment or maximum employment. On economist named Michael Kalski um has talked about this his

work uh comes up every once in a while. So we're gonna be speaking to an economist who himself has studied a lot of Kletzki's work and has done an own his own work on a lot of these questions, trying to understand a little bit more about this attention that full employment, full employment brings. We're gonna be speaking to a Yan Toparowski, a professor at so Is University in London, and uh So, Professor Taparowski, thank you so much for coming on odd lots, Thank you very much

for inviting me. Why don't you tell us a little bit about your what your your work and your research and sort of like what what drove you to sort of focus on some of these topics When I came into, uh, this kind of work, I actually came across Kalski when when I was when I first came to study economics. Now at the time when I actually didn't do my undergraduate studies in economics, it was more in sociology and

political science, um and what. The first job that I got was in fund management for the Church of England for an institution called the August Institutional, the Church Commissioners for England. And because I had had I had done one course in introductory economics, they thought, well, he knows something about it, and they put me into the best Change Investments department. Now this was in nineteen seventy four.

You're you're obviously too young to remember what happened around nineteen seventy four, But there was an oil price shock which in England was rapidly followed by a collapse in the real estate market, a collapse on the in the stock market. A couple of brokers brokerage houses went bust, UH banks started some some of the mark fringe banks UH went bust, A major bank tottered. The Bank of England had to call in the senior City of London

figures to try and shore up the position. UH. And for me, you know, as as a newcomer to all of this, I thought this was tremendously exciting. But I thought, well, I need to find out more about it. I need to study economics. So I went. I registered at Birkbeck College, part of the University of London, for an MSc in economics. UH.

And I was actually greatly disappointed. Was all my professors would stand up and say, look, we have this general equilibrium model at the economy and my my my senior professor, the senior professor there, a very distinguished American British economist. I remember standing in class and saying, look at the economy out there, it's in equilibrium. We know it's in equilibrium. You know the models say so. And I remember sitting there thinking, I don't know what world this man lives in.

You know what he was saying. You had no bearing, should no understanding of what was really going on. I remember going down into the library and flicking through some books and coming across a Polish name Kalitsky, and I thought, oh, I wonder what he has to say about this. I didn't realize that there was there any distinguished Polish economists. So I started reading the book and it was his early essays on the business cycle, and suddenly it all

made sense, uh, And it's continue to make sense since then. Albeit, I think I take a rather different for you too, many followers of of me, how Kalitski in a sense that I'm I have this background in in banking and finance side. This has always been my approach to the

work of Kalitzski. So I think your your question issues that you're raising are absolutely fundamental to my understanding of Klitzki, and I wish they were more fundamental to the understanding of many, uh, many of my friends and colleagues who uh you know follow Klitski. Well, yeah, talk to us then about what it was that you read that made

sense to you. And I'm particularly interested in the relationship between the business cycle and you know, theoretical equilibrium levels and full employment as as you kind of just alluded to, the general equilibrium approach is essentially a static approach. It tells you what situation will arise where there will be no further change. Uh. And this actually doesn't happen in the real world. What you have in the in the

real world is a constant state of flux. And this is why Kalitzki's approach to economics, focusing on a business cycle uh, I think, is really much more satisfying than than the approach, for example, of Kines in the general theory, which is which was essentially a static approach to a problem that is fundamentally dynamic. So what don't you explain? Because when I think of you know, Canes also wrestled with these topics of why don't why doesn't a market

economy on its own create full employment? Why is investment inadequate in typical times? Why do we tend to these periods of stagnation? How did Kollecgi differ from Canes and these questions? Well, let me start off with what he agreed with Kane's on and he agreed with Kanes that capitalism is fundamentally a system that in which the level of output, the overall level of output, and the overall level of employment is determined by the level of investment,

the level of business investment. Now, obviously in the in the post war, post Second World War economy, the government also has Government spending also has a lot to do with it. But fundamentally the in the the private sector. The level of activity in the private sectors really determined by the level of investment. And the question is what causes that level of investment to be unstable, much much

more unstable than for example, consumption. Uh and they This was an answer that in many respects tormented Coltsky throughout his life. He would put forward various models and then reflect on them and decide that no, they that they were wrong. Kane's sort of tried to cover up this problem by saying, or what it was all due to animal spirits. It's all due to uncertainty. And the problem with this is that you know uncertainty and um an animal spirits are not um measurable in the same way

that for example, steel production is measurable. It's really pushing the solution onto what cannot be seen and cannot be observed. And Clitski. Clitki's background was as an engineer, and he found this deeply, deeply unsatisfactory. Tried to resolve it. Certainly, he thought that the rate of interest didn't have uh much impact. He businessman, he thought, were on the whole much more much more cynical, much more hard bitten than to be influenced by let's say, ephemeral moods uh and

and temperament. In fact, the way in which corporations are constructed, that the hierarchical, bureaucratic way in which business corporations are constructed is is really in order to eliminate the effect of you know, passions and biases on issues like investment. In the end, what what critic you thought was really

most importantly it was the issue of capacity utilization. Businesses will invest if there if they've got customers that cannot be satisfied from existing production, uh even at full capacity. And what they will then do is if let's say, if the restaurant is full and there are still customers at the door, then the restaurant owner will invest in more tables more, you know, expanded his premises. So and he then explained it, interestingly enough in in the form

of a very nice parable. He said in in uh, in the United States, there are cities which are joined by more than one railway line, and the effect of their camp if you have, if they're both operating at less than full capacity, uh, the effects of competition between them will be that eventually one of those railway lines will uh go out of business and you'll end up in a situation with much less capacity uh and actually

much less employment, much much much less output. So what is the answer to this problem of under utilization of capacity? And build a third railway exactly you've read the article, Uh, it's it's a lovely parable. And then, of course the first two railway lines will be busy ferrying all the workers and the steel and required to for building the third railway line. And then of course you've now got three railway lines. At the end of this year, you

now have three railway lines. What you do then? And so he said, well, the answer is you build a fourth railway line and then problem and ye and he said, well, you know, all this sounds paradoxical, and but he said, well, it's the system that's paradoxical. And the reason why it's paradoxical is that it's a system that depends on the

level of investment. And what's critical about the level of investment is that it's the level of investment that, according to Kalitsky but also Kines uh determines how much profits businesses will make. Businesses invest a lot, they will make a lot of in profits. If they don't invest so much, then it's uh, it doesn't you You you have this problem of excess capacity, uh, discouraging economic activity, discouraging investment.

So my understanding of Knes is that, you know, Canes also wrote a lot about the business cycle and believed that the business cycle could be managed in one way or another through monetary policy or smoothed in some way. What does Kletski say about managing the business cycles or

investment given its importance in the cycle. Well, Kletski thought that managing the economy by trying to influence the level of investment, it's really a fool's game because you, uh, for example, you may lower the rate of interest or

lower the rate of taxation. Uh, you know, give additional tax allowances, and uh then you find that, okay, business takes it takes up a certain amount of investment, does some investment, and then requires further tax cuts, further cuts in the rate of interest in order to invest further. And it really, um, it really doesn't make sense. It doesn't make It didn't make sense for Kalitzky because the purpose of investment shouldn't be to maintain full employment. There

are other instruments for doing this. Uh, the purpose of investment should be to provide the capacity for the amount of consumption that is required in the economy. That you know, that's that's how a rational economy would operate. So this again was a small difference between Canes and Kaletski. Canes wanted UH investment to be the leader. Kaletski argued that in fact, you can create the equivalent of an investment

boom through fiscal stimulus. It has the same effect of expanding profits and in particularly using the fiscal stimulus to provide additional public goods and public services which would be provided free. So this gets around the problem of raising wages. You can increase real wages by providing free public goods. And then, of course the other way is to redistribute income from hiring incomes to lower incomes again by by

various transfer payments. So to bring it up to today, and I don't know if we have full employment because I'm not even I'm not even sure what that means. But we have very low unemployment, the lowest in fifty years. Um. Some might say, okay, that's close to full employment, but that's a separate debate. But people there's like this, it's

it repels people. It's ah, there's it's almost like there's like these white blood cells of the economy and it's like the Fed is coming in, it wants to raise rates. It talks about how the optimal situation would be at least a one percent increase, one and a half billion people laid off. You have investors who gets sort of a sense of relief every time the labor market data

comes in week. Why is there this discomfort in a state of the economy which, on paper you think lots of spending good, lots of reason to invest do capex good, that's everyone's investment to someone else's income. Why is there this sort of like rebellion against that? Can let's keep

put it in A argued that it's it's purely political. Um. He said that this he argued his faith in his famous article, uh, political aspects of full Employment, which I would recommend to anyone who doesn't know much Klitzki is very very easy to read. It. Not a single equation, but he oughta good he argued. There, but you know, there's no doubt that full employment is more rational for the system as a whole. It's more rational. Profits are higher,

employment is higher. Everything is better if you have full employment. However, full employment strikes at the heart of another feature of capitalism, which is the question of labor discipline. If you have a state of full employment, then uh, it's very It becomes difficult to discipline workers in the factory or in the office. If if a worker can leave his or her place of employment and immediately get another one, then where is the labor discipline? It's about control. It's it's

really about the control of labor. And Keletski argued that in in what would tend to happen is that in a state of m full employment you would get a political coalition UH, put together by major employers, UH, the people in finance UH, central bank, central bankers, all of whom would argue that the situation is somehow manifestly unsound.

Will unsound in what way? Well? Inflation? And sure enough, you know we we have had inflation, but we also know at the moment that inflation is coming down quite rapidly. As well, because so much of the current inflation was simply an energy market adjustment two sanctions on on Russian energy.

Uh So it's a kind of future inflation because the future is unknown, and it's very very easy to to say, oh, well, you know, things may appear okay at the moment, but we know we have these these and these economists with all these models showing that there's some terrifying inflation around. This kind of reminds me of the debate over work from home, which is, you know, post pandemic UM, people started working from home and there didn't seem to be much of a hit on productivity, and a lot of

companies still met whatever their internal benchmarks are. So then you had a lot of bosses who started talking about a degradation of corporate culture and how you know it's bad people are working from home. They might be doing okay um on a pure numbers basis, but in the long run it's going to impact the company by hitting culture. Uh yeah. Can you maybe connect more of what we've seen over the past year or two to Colletski's ideas, Do you think the post pandemic maybe shift um towards

worker power has vindicated some of his ideas. I think it has um it's it's it's vindicated a lot of these ideas because it's actually weakened, uh, the the the power of many businesses who uh, particularly businesses in uh in activities retail, hospitality, UH, these kind of these kinds of activities which transport even which I just saw that their markets shrinking, shrink shrinking quite drastically. The the what then happened, however, was that the speed of the recovery

as uh you know, lockdown was removed. I think a lot of those businesses took advantage of that situation to start raising their price And my view is that they were raising their prices because many of them had got seriously into debt, many of them had got had found their political position weakened. They had to go knocking at the door of uh of governments asking for loans, asking for tax free bates, various other uh you know, public subsidies.

Governments had responded by insisting on on no layoffs. UH. This kind of thing put UH companies, particular corporations into a difficult bind, and a lot of them got out of this by borrowing at record low rates in trust and then seeking to recover that borrowing by raising raising their prices. So you have my my explanation of the inflation is would be twofold. One is that you have

this energy costs, which is a temporary phenomenon. But the other one is really the what Richard Coup referred to as it is a type of balance sheet effect where firms are trying to clear off debt by by raising prices and I think doing it. Uh, they were doing quite successfully. But that then feeds into a narrative that the uh, that all this is the consequence of full employment, and therefore, uh, you know, must be it must show that the state of full employment is is financially unsound.

It isn't, of course, because the the the inflation has very little to do with with what's happening in the labor market. Wage increases have lagged lagged price increases. UH. Unions and workers in general have a much weak have a match weaker position in the labor market. Um to some degree, actually individual workers are benefiting from labor shortages, but in terms of organization, in terms of powering in what politically called the power in the factories, workers still

remain weak because worker worker organizations are weak. So we just have a couple of minutes left. But I just want to on the inflation question. A term that you hear political activists sometimes in the US probably around the world, like greed inflation, And I'm curious whether you think that's

a useful frame. It kind of doesn't sound like it listening that, of course, there are opportunistic situations and that for balance sheet reasons, corporations feel the impulse to uh to raise prices, But like greed kind of seems like

one of these things that's kind of immeasurable. I'm curious, like in your perspective or collect keys perspective, like, is that a useful analytical mode Perstally, I wouldn't use the word, uh, the term greed because it seems to be a kind of moralizing the fact that it's it's business practice to get the best possible price, uh for for your output.

I think there is a there is a sense in which, if you have excess capacity, uh, the excess capacity may, under certain circumstances, um cause a business to um not to raise prices to moderate greed. But on the whole, I think business decisions are not made on a kind of moral issue. You try to get the best out of the market. That's uh, it's it's the nature of

the system. So one thing that I always like to ask economists who have written biographies of other econom miss or who have studied their work, is is there any area in which you disagree with COLLECTI or think that maybe, you know, maybe he got it wrong, or maybe this particular theory could be improved or expounded upon. Yes, I think actually he well, he I think his political judgment, uh sometimes was when when when to skew for it?

I mean, if I can give a particular example from from the United States, he thought that the student movement against the Vietnam War or you know, was headed for failure. Uh.

And I think this was this was a misjudgment. He thought that American capitalism would it would be divided between the international capitals and American multinationals would be much more sensitive to the way in which America's perceived abroad, and uh, the domestic or business American businesses that only operating within the United States, who would be you know, maybe much more bullish. I'm not sure that this is a distinction

that that works quite well in the United States. I think I wished he I regret that he didn't write more about money, uh and finance, because I think he um in this way he um uh. It's it's too easy to dismiss his ideas as being characteristic of the long period between nine and let's say, the nineties seventies, when you know, really the stock market and finance were not terribly important and could and we're in a fact

dependent on on state support. M I think that they the situation now it's rather it's rather different and really needs um needs more working on. So I think this would be um kind of my my, my regret and my criticism. Plus the fact that I think he his um. He was a he was an engineer, and a feature of the type of economics of his time was that you had to you want success in profession by putting forward in a neat mathematical model. Now he knew that

this was this wasn't enough. You had to have some kind of roots in the way in which the system operated. But uh, you know, he tended to believe that once he'd once he'd put forward the equation and that was enough. And I don't think it was Jean Taparowski I'm afraid rut of time, but that was a fantastic Really appreciate you coming on. And I feel like perhaps, you know, Kine sort of got this revival after the Great Financial Crisis, and it feels like with collects thoughts right now is

people wrestle with some of this thing. More people are going to be discovering him. So appreciate you coming out odd lots. Thank you, Thank you very much for this opportunity, Tracy. I really enjoyed that. It does feel like, um, well, I mean there's a lot there. The political aspects of the question you brought about working from home, the sort of rebellion against worker autonomy, worker power, what happens when

it's really easy, potentially to find another job. I think it's like, for one thing, that's like a pretty important idea right now. Absolutely. I also thought the question of why so if you argue that, you know, private sector activity is dependent on the level of investment, but then why why does the level of investment change? Why is it more unstable that than consumption. That is a question that comes up all the time here on all plots,

right like why do these business cycles exist? Why do firms seem to you know, potentially overreact to slow periods and then overreact to um more active periods. I don't know, like I think it's still open to debate, but it

was definitely interesting to hear Coletsky's ideas on that. Yeah, and this idea that like and you know, um change like is UM pointing out like animal spirits uncertainty Like these are like it's like vibes, you know, like there's I think vibes are important, but also like they're a little bit unsatisfying to choose capacity utilization over vibes. Yea, yeah,

I mean why do vibes change? Right? That's like if you're if you sort of like lean too heavily into the vibes theory of economic cycles, then you have then you're just moved onto the question of like well why do vibes change? And so some of these questions about like capacity utilization, I do think they're helpful. I love like I love the railroad example of like, Okay, the problem is just keep building railroads, which you will maintain

like full demand. Then you'll end up with a hundred railroads. And this idea like this is the sort of like contradiction of the system is very As a regular user of amtrack, I say, build all the railroad build build them all. Now I am open to any and every possible explanation, um or I should say policy suggestion for smoothing business cycles, and this was a fascinating one. Absolutely All right, shall we leave it there? Let's leave it there.

This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Why Isn't Thal? You can follow me on Twitter at the Stalwart, follow our producer Carmen Rodriguez at Carmen Arman and Dash Bennett at Dashbot. And check out all of our podcasts at Bloomberg under the handle at podcasts, and for more odd Lots content, go to blue berg dot com slash odd Lots, where you can see the transcripts we blog. We have a

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