Kalecki and the problem of trend and cycle
Unlike Harrod, Kalecki did not believe that cycles arise along an endogenous trend. In order for growth to be self-perpetuating, investment, and therefore gross capital stock have to grow exponentially, at the same rate.
This requires that via profits, gross investment must generate a larger gross investment in the next period. Kalecki’s point was that this condition was unlikely to be met. First, a part of savings accrues outside enterprises, while firms are not in a position to indebt themselves sufficiently. Second, a capacity is created which depresses investment. Its strength will depend on the prevailing technique; a high capital coefficient providing relatively little capacity for a given investment, will favour the automatic increased growth, while a low capital-coefficient will have the reverse effect.In addition, Kalecki’s belief in the absence of an endogenous trend was connected to the issue of cycles. Frisch and Holme (1935) show that Kalecki’s initial business cycle model could produce damped cycles but no trend or alternatively trend but no cycles. In discarding the trend solution, Kalecki could explain growth only as due to an exogenous stimulus which was able to propose an explanation for why cycles do not fade away. More generally, this approach was more relevant to an explanation of capitalist contradictions: “I believe that the antinomy of the capitalist system is in fact more far-reaching: the system cannot break the impasse of fluctuations around a static position unless economic growth is generated by the impact of semi-exogenous factors such as the effect of innovation upon investment” (Kalecki 1962: 134).
Kalecki considered that the main shocks were innovations. The effect of innovations on investment rests on the innovator’s expectation of extraordinary profits, an expectation which is created not by the actual process of the cycle but is part of the circular system of demand and investment as extraneous factors which is based not on earnings experience but on the anticipation of something quite new. The trend-generating effect depends essentially on the assumption of a continuous stream of innovations: in other words, the stimulus has to be repeated again and again, so that the negative effect of creation of new capacity is compensated.